Abstract
The paper deals with a long-standing problem in the debate on economic growth — viz. the issue of stability of the balanced growth path in macroeconomic growth models. We first consider an early claim that the replacement of a fixed coefficients technology by a neoclassical production function provides the solution to the Harrod-Domar knife-edge instability problem, and proceed to investigate the stability and onset of oscillations in an “augmented” neoclassical model of macroeconomic growth. The model embeds a Constant Elasticity of Substitution (CES) production function, sluggishly adjusting and non-market-clearing real wages, and endogenous fertility. The analysis shows that (i) Solow models may suffer instability; (ii) a spark-triggering instability may be due to the presence of a too strong “neoclassicity” in production; and (iii) strong “neoclassicity” may lead to sustained oscillations of the economy and also to knife-edge instability.
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